“No one has been able to explain to me why it is not better for mortgage holders to get a fair return of principal back, albeit at a lower interest rate, than to take a lump sum through foreclosure that is
probably much less than the value of the note,” Judge Leonard of the Eastern District of North Carolina Bankruptcy Court writes.

Chapter 13 bankruptcy is no “walk in the park”, Judge Leonard says. Debtors must make full financial disclosure, be subject to examination by the trustee and creditors, follow strict rules, make payments on their debt adjustment plans, and be supervised by the bankruptcy court. Chapter 13 cases for debtors who do not comply are dismissed and all debts reinstated.

“That is precisely why allowing mortgage modifications is such a good approach. It would elegantly separate those homeowners who desperately need to stay in their homes and have sufficient incomes to make reasonable payments from those investors who bet on lax regulation, easy credit and an appreciating market in buying residential properties,” Judge Leonard says. “Those in the latter category will have no use for this process, but for the first category, it could be a powerful step back to financial stability.”

Residential homeowners are the only borrowers who cannot restructure their mortgage debts in bankruptcy. Owners of business real estate, rental properties, vacations homes and farms all may modify their loans in chapter 11, 12 or 13 bankruptcy.

Judge Leonard questions the protection residential mortgage holders have in the bankruptcy law now, given the current economic circumstances and today’s reduced lending regulation, which was the premise for the exception when the loan was enacted.

Jill Michaux has helped Kansas consumers with debt problems for three decades. She and her partner, Mark Neis, are Topeka's only bankruptcy specialists, board certified in consumer bankruptcy law by the American Board of Certification. She help start the National Association of Consumer Bankruptcy Attorneys.